Inflation - Help (1 Viewer)

[sunjet]

HOW does it actually curb economic growth? Is it because it distorts resource allocation, redistributes income, reduces our international competitiveness.

I doubt just the rise in prices, means people consume less because when there is inflation real interest rates are reduced and thus actually spend more.

Explanation please.

 

[Jago]

I think one reason is that as inflation increases, exports will be less competitive and imports more attractive, thus leading to a current account deficit and therefore restricting economic growth.

It may not be the main reason though...

 

[StevChe]

well inflation tends to reduce eco growth as inflation rises prices of goods and services do.. this discourages the sale of goods and services which leads to fewer exports and heavey reliance on imports thus reducing interntional competitivness. It also impacts on the labour force as unemployment rises as less goods and services being provided. THe CAD is also affected by rising inflation.. Hope this helps

 

[im an idiot]

higher prices means noone wants our G&S, includng us, therefore we buy more imports thus our economy falls to shit

 

[Haku]

actually the main reason is due to lowering of investor confidence. For example, when high inflation occur, real profit from investment take longer to materialise and sometimes even negative profit result with the value of money depreciating at a faster rate than the level of profit gained. This cause contagion. Further the fact that it create a high CAD causes external instability leading to lower investment into the economy.